Business Relief for Inheritance Tax

01 October 2021

5 minute read

Our Wealth Planners can help to maximise the benefits of Business Relief on your future Inheritance Tax bill and the financial security of your loved ones.

Ignoring the impact of Inheritance Tax (IHT) could be a costly oversight. The HMRC reported IHT receipts of £5.33bn1 for the 2020/21 tax year. For anyone looking to bequeath their financial legacy to family and loved ones after their passing, whether through property, money or any other form of possessions, careful consideration should be given to the available estate planning solutions and how such services may significantly improve your overall inheritance tax bill.

In summary, if your estate is valued over a certain threshold, known as a nil rate band, then an IHT rate of 40%2 will be applied. There are some further complexities and nuances around inheritance tax which can change depending on your individual circumstances, all of which can be clearly explained on a case by case basis by our team of Wealth Planners. In this article, we'll discuss how utilising Business Relief can help you manage your IHT bill.

1) How Inheritance Tax works

No IHT is paid on estates valued up to £325,0002 – the ‘nil-rate’ threshold – and 40% is paid on amounts above this. This threshold is frozen up to and including the 2025/26 tax year, as announced in the March 2021 Budget3. The threshold applies to each individual in a marriage or civil partnership.

When an estate is above the nil-rate threshold and includes a family home being passed to direct descendants, it may also be entitled to an additional ‘residence’ nil-rate threshold (there’s no Inheritance Tax to pay when leaving a home to a spouse or civil partner).

For the 2021/22 tax year, this additional threshold raises the nil-rate threshold to £500,0003. This threshold is also frozen until 2025/26. However, estates worth more than £2 million lose this additional threshold at a rate of £1 for every £2 over the £2 million threshold4.

Gifts between spouses or civil partners, whether made in life or on death, benefit from a spouse exemption, and can be passed on tax-free. Unused nil-rate and residence nil-rate threshold can be passed on in this way, too, which means a surviving partner’s threshold could be as much as £1,000,000 in 2021/2022.

2) Understand your options

When it comes to estate planning and the mitigation and reduction of Inheritance Tax liabilities there are a few options available and careful consideration should be given to client suitability based on your specific circumstances. Business Property Relief, or now commonly referred to as simply Business Relief, was originally introduced in 1976 as a form of IHT protection for the passing down of family business through generations. This initiative has evolved over time and the scope for companies which meet the set criteria to benefit from Business Relief has expanded along with the popularity of this tax efficient product.

Nowadays, Business Relief is tax relief designed to increase investment in certain types of trading businesses.
Where it applies, you are exempt from paying Inheritance Tax on your share of a business partnership, or on the value of unquoted shares. To qualify for Business Relief, investments must be held for at least two years before death5.

3) What qualifies for Business Relief?

Legislative guidelines set by the HMRC determine which companies qualify for Business Relief status. Currently, only private unquoted companies and those listed on the AIM London stock exchange can qualify, however, these qualities do not simply guarantee qualification. Another key prerequisite is that the company must be actively trading, meaning the firm can’t just hold cash, investments or property.

4) Understanding how you could benefit from Business Relief

If you have an estate which exceeds your personal Inheritance Tax free threshold, then Business Relief should be considered as an effective estate planning strategy and a key tool for significantly reducing your future IHT bill.

Business Relief offers a range of benefits which compare favourably to other existing more conventional IHT strategies. You will receive greater control over your assets with all qualifying shares held in your own name. It also takes just two years for qualifying shares to provide 100% IHT mitigation, provided you still hold the shares at the point of passing. Additionally, your Business Relief qualifying investments will not chip away at your nil rate band, preserving this tax free allowance for less liquid assets, such as property.

As always, equal consideration should be given to the risks associated with a strategy dealing with unquoted, largely illiquid companies with an increased potential for valuation volatility. Our team of Wealth Planners is available to make sure you understand all the risks and benefits before you reach a decision.

5) Navigating the Business Relief investment landscape

It's important to acknowledge and understand that conclusive confirmation of a shares Business Relief qualifying status is only provided by the HMRC after the investors death. Asset Managers which specialise in the management of discretionary portfolios targeting Business Relief qualifying companies can help navigate this legislative minefield and reduce the risk of any unexpected IHT charges, whilst also potentially generating a source of flexible income from positive investment returns.

Through rigorous and comprehensive investment and operational due diligence conducted by a team of skilled analysts, Barclays Wealth Management has carefully constructed a panel of three Business Relief products providing diversity through asset class and investment strategy. Our current panel provides IHT solutions through discretionary managed portfolios with exposure to a range of businesses, including renewable energy solar and wind farms, property lending firms and businesses which provide asset backed loans to media and entertainment companies.

We believe the experience, proven track record and operational robustness of our approved third party Business Relief managers can help you maximise the benefits of Business Relief on your future IHT bill and the financial security of your loved ones.

Next steps

Discover alternative ways to manage your inheritance tax bill.

If you'd like to arrange a meeting with a Wealth Planner to discuss your options, speak to your Wealth Manager.

Your Wealth Planner can help you understand the effect of tax on your wealth and offer tax-efficient wrappers for your investments. They’ll be able to guide you towards making the right decision for your financial planning needs. Your planner can't offer tax advice – you should seek that independently. Please bear in mind that tax rules can change in future and their effects on you will depend on your individual circumstances.

This article does not constitute personal financial, tax or legal advice. Each person’s circumstances are different so if you're unsure about investing, you should seek advice from a regulated adviser.

Things to consider

The value of investments can fall as well as rise. You may get back less than what you originally invested.

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